LONDON, 20 October 2004 — Oil prices fell again yesterday on signs that high energy costs are slowing the economic growth that has fueled this year’s sharp increase in world oil consumption.
US light crude was off 32 cents at $53.35 a barrel following Monday’s $1.26 slide from a record close on Friday of $54.93. Prices are down 4 percent in two days. Brent crude in London eased 11 cents to $48.80 a barrel.
The reversal comes as evidence mounts that rocketing fuel costs are starting to slow the economic growth that ignited this year’s demand-led oil rally. “I think the perception was that if prices go much higher it starts impacting the economy and demand doesn’t grow as fast,” said Peter Thiel, president of Clarium Capital Management LLC, which manages over $250 million. “Barring a new crisis in Saudi Arabia, Iraq, Nigeria or other trouble spots, I don’t think it screams higher to $65/$75 in the near term.”
Demand growth, led by China, has raced along this year at a 24-year peak of 2.7 million barrels a day, 3.4 percent of the 82.4 million bpd world market. On Monday, Wall Street banks Morgan Stanley and J.P. Morgan cut their estimates for 2005 economic growth, saying high fuel costs were likely to mean a slowdown in consumer demand.
“While high prices affect consumer spending immediately, typically the demand side response to high prices takes three to six quarters to feed through to consumer price indices,” said Marshall Hall of London energy consultancy EMC. “That means we will still be feeling the effect of $50 oil on the economy in late 2005.”
Economic officials in the United States, Europe and Japan have sounded warnings on the impact of surging oil prices. “We are looking at the rise in oil prices as the biggest risk factor if it continues for a long period,” Japan Economics Minister Heizo Takenaka said.
France Finance Minister Nicolas Sarkozy yesterday said he will propose to his European Union peers this week a joint action to ensure that high oil will not damage growth. Speaking to Parliament, Sarkozy stuck by Paris’ forecast for the French economy to grow by 2.5 percent next year but added that he was “aware of the tension” created by oil.
OPEC on Monday cut its forecast for world oil demand growth next year by 130,000 barrels per day to 1.61 million bpd in anticipation of the impact of high prices on fuel consumption.
China and India have led this year’s increase in oil consumption but the huge increments in Chinese demand are now showing signs of slowing. The head of Asia’s biggest oil refiner, China’s Sinopec Corp., predicted yesterday that domestic demand in the world’s second-biggest oil consumer would moderate in 2005. “We expect China’s oil products demand growth to slow slightly from this year to 8 percent to 10 percent,” Sinopec President Wang Jiming told reporters in Beijing.
Chinese oil demand so far this year is up about 15 percent, but consumption is expected to ease as the government moves to prevent the economy from overheating. Continued concern over a shortage of heating fuel is likely to underpin prices. Forecasts for weekly US inventory data, out on Wednesday, predict heating oil stocks will fall.
US crude output from the Gulf of Mexico is still running 27 percent below normal after Hurricane Ivan and the shortfall has limited refiners’ ability to build heating oil stocks.
Worries over a disruption to the world supply chain were revived when saboteurs attacked Iraq’s northern export pipeline, setting a section on fire. An Iraqi oil official said crude exports continued to flow through an undamaged twin line.